Evan Soltas
May 9, 2012

Choose Your Own Adventure

Chaos in Greece edition

Do you remember what your favorite book was when you were little?

If you were a child in the Eighties or Nineties in the United States, it is quite likely that book was one of the "Choose Your Own Adventure" series. They were these fun little volume in which you would start at the beginning of a story, and as you read, you would be prompted to make decisions as the protagonist. Do you take the passage to the right in the cave, or to the left? Do you go upstairs and find the witch, or do you run away? Once you made one decision, you'd be directed to a new page further into the book, and you'd start reading until you came upon another decision -- and in this way, you would have determined the course of the plot and its ending.

I feel like Greece is in in the middle of one of these "Choose Your Own Adventure" books right now. Riot in the streets, or accept austerity quietly? Renegotiate your debt, or subjugate yourself to payment plans in perpetuity? Elect a bunch of neo-Nazis and Marxists to Parliament, or vote for the status quo?

So I am being a little bit irreverent, but not entirely unserious. As Eurozone exit becomes increasingly likely for Greece, Spain, or another troubled nation -- the likelihood such an event, as implied by the median prices of Intrade securities, has risen by double digits in the last 48 hours.I would say I've been vindicated, since I wrote twice in April that I thought that things would get abruptly worse and that Intrade was significantly underestimating the likelihood of such a Eurozone exit event -- but this is really, really not the sort of thing for which I want to be vindicated.

Anyway, the rising likelihood of a Eurozone exit would make it utter folly if the European Central Bank was not making very detailed plans -- a sort of "economic wargaming" -- of how it could ease such nations out of the currency union without, say, bringing down the global financial system. Unfortunately, I don't see "utter folly" as an unfair description of ECB management since 2008, which makes me fear that such plans have not been or are not being developed.

I think that's probably out of a subconscious fear that if the ECB starts privately talking about and planning for a Eurozone exit, then somehow that decision makes the event more likely. And that strikes me as ridiculous, unless the planning news was leaked in a damaging way. What would be really dangerous would be if the ECB's plan was nonexistent in the event of crisis.

So let's play. Press here to begin. (Note: Don't scroll down. This is as low-tech as "Choose Your Own Adventure.)

ECB President Mario Draghi at the EP
You are Mario Draghi, the President of the European Central Bank. It is May 9, 2012. The latest news is that after Sunday's election, none of the Greek political parties have been able to form a coalition government. None appear they will be so able, given the sharp political division on the central questions of austerity and Eurozone participation, and the heavy losses taken by centrist parties to the far left and right. A second round of snap elections is likely to occur on June 10. If a government cannot form to continue negotiations, Greece will violate its bailout agreement, which stipulates that Greece will make an additional 11.5 billion euro in budget cuts by June. Failing that, Greece will run out of funds in July and will be forced into default.

What do you, Mario Draghi, do?
(a) Nothing. Greece is a sovereign democracy; it must be free to make its own political decisions without outside interference.
(b) Get on the phone with the leaders of New Democracy, Syriza, and Pasok and pressure them privately to form a coalition government -- you need all three of them to sign on, or two plus an assortment of fringe groups.
(c) Go public, and pressure Greece to form a government with the parliament it now has.


It's May 16, 2012. Greece's parliament indeed fails to form a government, and so a second round of elections are scheduled for June 10. New Democracy, Greek's mainstream conservative wing, is trying to make the election a referendum on the euro. Syriza, the far-left party which came in second two weeks ago, is trying to gain strength by promising a coalition of the left which will push hard to renegotiate on Greece's debt, leaving the option of default or Eurozone exit on the table.

What do you do now?
(a) Nothing. Greece is a sovereign democracy; it must be free to make its own political decisions without outside interference.
(b) Go public, and pressure Greece to form a government with the parliament it now has.


It's June 11, 2012. The next package of budget cuts, a total of 11.5 billion euro, is due in a week, and the results of the latest election are now in. As expected, they aren't pretty and leave no easy option of a coalition, which requires 151 seats in Parliament:

New Democracy (center-right, pro-bailout): 24%, 105 seats
Syriza (left, position unclear): 27%, 125 seats
Pasok (center-left, pro-bailout): 11%, 30 seats
Independent Greeks (right, anti-bailout): 12%, 30 seats
Communist Party of Greece (far-left, anti-bailout): 7%, 12 seats
Golden Dawn (far-right, anti-bailout): 10%, 26 seats
Democratic Left (left, pro-bailout): 3%, 7 seats
Small parties (mixed): 6%, no seats
The procedure is that New Democracy has 48 hours to form a government, then Syriza, then Pasok. Should that fail, Greece will violate its obligation to cut 11.5 billion euro and be around one month away from running out of funds entirely.

What do you do now?
(a) Nothing. Greece is a sovereign democracy; it must be free to make its own political decisions without outside interference.
(b) Get on the phone with the leaders of New Democracy, Syriza, and Pasok and pressure them privately to form a coalition government -- you need all three of them to sign on, or two plus an assortment of fringe groups.
(c) Go public, and pressure Greece to form a government with the parliament it now has.


"Pronto, c'è Antonis, per favore?" ["Hello, is Antonis there?"] You've just called Antonis Samaras, the head of the conservative, pro-bailout New Democracy party. You remind him of the case for urgency -- "a government is needed now in Greece, Antonis," you say, "not in June."

"Alright, Mario -- but who do I try to form a government with?"

(a) "Syriza and Pasok, Antonis. Tell them that this is a moment of crisis for Greece, and that although your politics are vastly different, both of you agree that Greece should first try to renegotiate its debts, and you'll have a large and convincing majority in Parliament. Should that fail, then you're open for new elections."
(b) "I don't know, Antonis. Let me call you back." Call Syriza.


"Pronto, c'è Alexis, per favore?" ["Hello, is Alexis there?"] You've just called Alexis Tsipras, the head of the leftist Syriza party. "Alexis, your party needs to keep in mind what is ultimately best for Greece. Angela and François are willing to renegotiate the terms of the bailout package, but first you need to form a government."

"Alright, Mario -- but who do I try to form a government with?"

(a) "Pasok and the Democratic Left, Alexis. Tell them that this is a moment of crisis for Greece, and both of you agree that Greece should first try to renegotiate its debts, and you'll have a large and convincing majority in Parliament. Should that fail, then you're open for new elections."
(b) "I don't know, Alexis." Go back to your other options.


Antonis Samaras is unable to form a coalition with Syriza and Pasok, despite your best effort to pressure Greek politicians to get their act together behind the scenes. Proceed to the elections.


Alexis Tsipras is unable to form a coalition with Pasok and the Democratic Left, due to opposition within his own party -- remember, he's the head of a far-left coalition which rose to power on an anti-incumbent wave. (What were you thinking?) Proceed to the elections.


REUTERS BREAKING NEWS -- Frankfurt, Germany -- Mario Draghi, the President of the European Central Bank, spoke publicly today about the political situation of Greece, calling on the leaders of the troubled nation's political parties to assemble a broad coalition government.

Draghi's appeal, however, failed to win the support of Syriza party head Alexis Tsipras, whose support was needed for a successful coalition government. In fact, there are signs it has alienated Tsipras and many Greeks, who found Draghi's comments intrusive into Greece's internal politics.

"I had voted for Pasok," one voter said. "But now I'm going to vote for Syriza. They're the ones who will fight for Greece to get a fair deal from the ECB, instead of this horrible austerity.

"New Democracy had been my party, despite these troubled times," said another. "Now I'm worried that they'll be a shill for Draghi and Merkel, who want to control Greece and make us suffer. I'm considering voting for Independent Greeks, the anti-bailout party, or maybe even Golden Dawn."

Now that you have made a bad situation worse, proceed to the elections.


It's June 22, 2012. Greek politicians were unable to form a government in time to pass the 11.5 billion euro in budget cuts required to meet their bailout agreements. They're now broken. Financial markets in Europe and around the world are now growing uneasy as to what will happen next, given that Greece will run out of funds and be forced into default only weeks. July is nearing closer and closer.

What do you do?

(a) Nothing. Greece will not receive further bailout funds until it organizes its government, and if there is no arrangement by July, Greece will go into default. The ECB will encourage European banks to build up liquidity cushions, and it will lower its discount rate and expand reserves to accommodate financial stress.
(b) Buy time. Work with French president-elect François Hollande and German president Angela Merkel, to waive Greece's requirement of 11.5 billion euro in budget cuts, delaying such cuts for one month, when, presumably, it will have a government.


It's July 6, 2012. The payments from Greece's negotiated bailout stopped several weeks ago, and now all of the funds are gone. Greece faces a multi-billion-euro payment on its debt tomorrow, which of course it will not be able to make. S&P has already announced that Greece will go into default, and all heck is breaking lose in financial markets, despite ECB cushioning. There are worries that a major European bank could go under sometime this week.

What do you do?

(a) Nothing. Greece must face the consequences of its actions, and the ECB will increase reserves in the system to ensure financial stability.
(a) With the sign-off from French president-elect François Hollande and German president Angela Merkel, use ECB powers to make large purchases of Greek bonds to help the country temporarily avoid the worst of default, and from financial markets from falling apart.


"Pronto, c'è Antonis, per favore?" ["Hello, is Antonis there?"] You've just called Antonis Samaras, the head of the conservative, pro-bailout New Democracy party. You remind him of the case for urgency -- "a government is needed now in Greece, Antonis," you say, "this is Greece's very last chance."

"Alright, Mario -- but who do I try to form a government with?"

(a) "Syriza and Pasok, Antonis. Tell them that this is a moment of crisis for Greece, and that although your politics are vastly different, both of you agree that Greece should first try to renegotiate its debts, and you'll have a large and convincing majority in Parliament. Should that fail, then you're open for new elections."
(b) "I don't know, Antonis. Let me call you back." Call Syriza.


"Pronto, c'è Alexis, per favore?" ["Hello, is Alexis there?"] You've just called Alexis Tsipras, the head of the leftist Syriza party. "Alexis, your party needs to keep in mind what is ultimately best for Greece. Angela and François are willing to renegotiate the terms of the bailout package, but first you need to form a government."

"Alright, Mario -- but who do I try to form a government with?"

(a) "Pasok and the Democratic Left, Alexis. Tell them that this is a moment of crisis for Greece, and both of you agree that Greece should first try to renegotiate its debts, and you'll have a large and convincing majority in Parliament. Should that fail, then you're open for new elections."
(b) "I don't know, Alexis." Go back to your other options.


Antonis Samaras was able to form a government, thanks to your pressure, as he was able to twist Alexis Tsipras' arm, and had the reluctant support of Evangelos Venizelos, the head of Pasok, already.

However, now Greece has one day to push its austerity bill through the Parliament. That's no easy task -- and the coalition could very well fail at it, Antonis warns. He suggests that the ECB, Germany, and Greece's creditors work together to reduce Greece's immediate bailout payment, the remainder of which it will pay off at a later time.

What do you do?

(a) Nothing. Greece has got to pay up per the original bailout plan.
(b) Work overnight to arrange a small bondholder haircut, with added support from the ECB in the form of ECB purchases of Greek bonds and a sign-off from French president-elect François Hollande and German president Angela Merkel. Greece will still pass large budget cuts of 8 billion euro, not the full 11.5 billion as originally required.


Alexis Tsipras was unable to form a government. Your private pressure was insufficient for him to bring around the left wing of his coalition to support a coalition with Pasok, which would force his party to sign off on the continuation of austerity. Since you couldn't get Greece to form a government, proceed to what happens when Greece misses the deadline on their scheduled budget cutbacks.


REUTERS BREAKING NEWS -- Frankfurt, Germany -- Mario Draghi, the President of the European Central Bank, spoke publicly today about the political situation of Greece, calling on the leaders of the troubled nation's political parties to assemble a broad coalition government.

Despite Greece's two consecutive elections, the political environment had been at stalemate, with no party able to form a coalition government. Draghi's entrance, however, forced Syriza president Alexis Tsipras to enter negotiations with the heads of rival parties New Democracy and Pasok. His timely pressure may have succeeded, experts on Greece now think, in forcing a left coalition government only days before Greece was to miss critical deadlines to cut its fiscal deficit.

Greece's parliament is now working towards passing these austerity measures. Some say, however, that ECB president Mario Draghi may cooperate with French president-elect François Hollande and German president Angela Merkel to loosen conditions on the bailout agreement to lower Greece's hurdle in case of failure.

What do you do?

(a) Nothing. Greece has got to pay up per the original bailout plan.
(b) Work overnight to arrange a substantial bondholder haircut, with significant support from the ECB in the form of ECB purchases of Greek bonds and a sign-off from French president-elect François Hollande and German president Angela Merkel. Greece will pass a token austerity plan to help Hollande and Merkel save face, totaling 1.5 billion euro, around one tenth of the 11.5 billion euro as was originally required.

You've successfully bought time -- no more than a month -- but during the interim, Greece must form a government, renegotiate its bailout plan, and make large payments to bondholders.

What do you do?

(a) Get on the phone with the leaders of New Democracy, Syriza, and Pasok and pressure them privately to form a coalition government -- you need all three of them to sign on, or two plus an assortment of fringe groups.
(b) Go public, and pressure Greece to form a government with the parliament it now has.


Unemployment continues to rise in Greece. It's now nearing 25 percent! Austerity isn't working, and Greece is increasingly unable to raise funds in debt markets or meet its scheduled bond payments.

What do you do?

(a) Nothing. Greece has got to pay up per the original bailout plan.
(b) Arrange another bondholder haircut, with added support from the ECB in the form of ECB purchases of Greek bonds and a sign-off from French president-elect François Hollande and German president Angela Merkel. Greece will continue to make large cuts in its budget, but not to the extent it was originally required.


Crisis, at least for the moment, has been averted in Greece. The immediate budget cuts have been made or were postponed, and Greece's new government now is back on track to make its debt payments, although burdensome.

There is, however, talk that this coalition government will not last. Should it fall, it will endanger all the work you have done so far. A number of economists are saying that now, given calm financial markets, is the right time for Greece to make a managed transition out of the Eurozone.

What do you do?

(a) Nothing. Greece should remain on the euro. For what else has it endured such terrible austerity and political tumult?
(b) Force French president-elect François Hollande and German president Angela Merkel to sign off on a major expansion of the ECB balance sheet, making loud and public preparations for Greece's exit. You want to convince financial markets that everything is going to be OK. You also cut interest rates down to the zero lower bound, begin talks with bondholders about an additional haircut, and agree to finance Greece's immediate funding needs for 2 years if they lose access to debt markets.


Congratulations. You, Mario Draghi have led Greece safely out of the Eurozone when it seemed utterly impossible to avoid financial crisis. (You've won the game.)

Greece is now in default. Financial markets are in panic; the eurozone itself is near collapse. Greece is planning to exit the eurozone, at least, now that it's lost access to debt markets. (You've lost the game.)